Tip: Use a High Interest Savings Account to Save for a Home

It is really important that you save
up for a house before applying to get a home loan. Doing so allows you to
accrue a better down payment. This reduces the amount of money that you need to
get on loan, saving you a lot of money in interest charges over the years. One
great tip that you should pay attention to is to use a high interest savings account
when saving up for your home.

What is a high
interest savings account?

As the name suggests, this is a savings account that has a
higher rate of interest than a traditional savings account. The high interest
account may be in the form of a money market account or a CD. Typically this
means that you will be required to leave the money in your account for a
certain period of time before you are allowed to withdraw it. For example, you
may get a high interest 6-month CD so you would have to wait until the money
had been in the bank for 6 months before withdrawing it to use as the down
payment on your home.

Why use a high
interest savings account when saving for a home

Obviously the core reason to save your money using a high
interest savings account is because it means that you’ll be earning more
interest on your savings. The more money that you have to put into savings and
the longer that you’re willing to save it for, the higher rate of interest you
can enjoy. This means that just be keeping your money in the bank you’ll be
earning additional money. You don’t need to do anything else except keep saving
it there to have additional funds at the end of the loan period.

For example, let’s say that you currently have $10,000 saved
up towards the down payment for a home. If you were to invest than in a high
interest savings account with an interest rate of 3% compounded monthly over a
twelve month period then you would end up with more than $10,300 in total. That
means that you’ll have an extra $300 for your down payment after a year of
keeping your money in savings.

This savings option makes sense for any type of savings.
However, it especially makes sense when saving for a home. That is because
saving for a home requires that you save up a large sum of money. That means
that you’re going to be saving for an extended period of time. High interest
savings accounts have the best return on your investment when you are willing
to invest the money over a long period of time. Since you’re already waiting
for awhile before using that money, it shouldn’t be particularly inconvenient
to put that savings into a high interest account.

Some things to
consider

Some of the things that you might want to consider when
using a high interest savings account to save for a home include:

o Length
of CD term. It is important that you think about the length of time that you
want to keep the money in savings before you use it to buy a home. The longer
that you keep your money in the account, the higher rate of interest you may be
able to get and the more money you’ll have earned on the savings when it’s time
to withdraw from the account. However, you won’t be able to buy your home until
that time period is over (because early withdrawal from high interest savings
accounts usually incurs a fee). Somewhere between one and five years is usually
right for most people who are using a high interest savings account to save for
the down payment on the home.

o You
won’t be able to add additional savings to the account. Most high interest accounts
don’t allow you to keep making additional deposits into the account during the
term period. There are a few ways that you can handle this. One is to look for
an account that does allow you to make deposits either regularly or annually.
Pay attention to the interest rates, though, as such accounts sometimes don’t
offer the highest rates in the market. Another option is to save up
periodically and open additional CD accounts. For example, you might open your
first CD account as a five-year account. Then you might save for another year
and open a second account as a four-year account. Then you would save for
another year and open a third account as a three-year account, etc. All of
these would be able to be withdrawn at the same time and used for the down payment
on your home.

o You
won’t be able to withdraw the money. If you’re just starting out with saving
for a down payment on a home then you may not be sure how stable your finances
are going to be. This can make it scary for you to consider using a savings
account that doesn’t allow you to withdraw your money. If you are too wary of
this option then consider using a no-fee CD or a high interest checking account
as an alternative. You won’t get as high of an interest rate on your investment
but you will have the option of withdrawing the money as needed. Of course,
every time that you do withdraw that money, you’re taking away from the amount
of money that you have for the down payment on your home. That’s just something
to be aware of.

How much money do you hope to save up for the down payment
on your home?

More by this Author

Crochet is one of those crafts that can be really
inexpensive if you’re smart about your crafting. It can also be really
expensive if you’re not careful. I know that I can easily spend a lot of money
just on...